RBA focus too much on inflation

ONE of Australia's largest superannuation funds says the Reserve Bank of Australia (RBA) should consider more than inflation when it considers interest rate policy.

Industry Funds Management chairman Garry Weaven said today the RBA's approach to inflation, which was adopted under previous governor Ian MacFarlane and former federal treasurer Peter Costello, was now "totally inappropriate".

"It is very hard to get the balance right, but consistently now for many years the Reserve has had far too much focus on inflation only and not enough on employment and economic prosperity generally, which is their requirement under the Act," Mr Weaven told ABC Radio today.

"It seems to be still unduly influencing the Reserve in its policies."

The central bank sets monetary policy - by managing cash interest rate levels - with the aim of keeping inflation within a target band of two to three per cent over the course of the economic cycle.

Inflation, as measured by the consumer price index, was 3.1 per cent in calendar 2011.

The RBA's preferred measure of underlying inflation, which removes volatile price movements, was at 2.6 per cent.

Treasurer Wayne Swan said he disagreed with Mr Weaven.

"What I do is, I support the Reserve Bank implementing its current charter," he told ABC Radio.

"It takes its decisions independently of the Government and that is as it should be."

Mr Weaven said Australia's cash rate was high compared to other advanced economies, placing pressure on business.

Australia's cash rate of 4.25 per cent compares to base rates of 0.125 per cent in the US, 0.1 per cent in Japan and 0.5 per cent in the UK.

"We do have signs of real weakness in retail and manufacturing, but more importantly in a way we have very high interest rates by international standards," Mr Weaven said.

"High interest rates push the currency high and that is very, very bad for manufacturers, tourism and some other industries."

He said lower interest rates could help depreciate the Australian dollar, which is currently above $US1.03, and reduce the pressure on exporters.

"That would be a very good thing overall for the economy," Mr Weaven said.

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